Jack Townsend offers this blog on Federal Tax Crimes principally for tax professionals and tax students. It is not directed to lay readers -- such as persons who are potentially subject to U.S. civil and criminal tax or related consequences. LAY READERS SHOULD READ THE PAGE IN THE RIGHT HAND COLUMN TITLE "INTENDED AUDIENCE FOR BLOG; CAUTIONARY NOTE TO LAY READERS." Thank you.

Monday, November 11, 2013

New IRM Provision for FBAR Appeals (11/11/13)

The IRS has published a new IRM provision -- Part 8. Appeals, Chapter 11. Penalties Worked in Appeals, Section 6. FBAR Penalties, here. The indicated "Material Changes" are

(1) Updated references and made editorial changes throughout.

(2) Revised IRM 8.11.6.1 to discuss new forms available for electronic filing, clarifies when Alternative Dispute Resolution rights are not available for FBAR cases, made reference to mitigation threshold conditions for FBAR penalties, joint and severable liability, accrual of interest, unagreed closings, bankruptcy relief, electronic filing requirements for FBARs, and the venue for FBAR cases. Changed the time for completing post-assessed FBAR cases from 60 days to 120 days.

(3) Revised IRM 8.11.6.2 clarifies premature referrals, updated information on how to contact the FBAR Coordinator, added that protested years should match the case summary card, and added that IRS Counsel memo is needed for willful penalties over $10,000.

(4) IRM 8.11.6.3.1 Clarified that an Appeals Officer has the authority to execute a Title 31 FBAR extension.

(5) Moved Account and Processing Support (APS) procedures for establishing FBAR cases on ACDS to IRM 8.20.5.24.

(6) IRM 8.11.6.5 Clarified the information to be verified and contained on the case summary card for FBAR cases. Changed the time for completing post-assessed FBAR cases from 60 days to 120 days.

(7) IRM 8.11.6.6 Clarified instructions for processing a payment received for an FBAR penalty.

25 comments:

Once the person with the more lenient treatment has signed the 906, and it has been countersigned by the IRS (and delivered, so he can prove it has been countersigned) I do not believe that the IRS could revise that number upward with the exception of the taxpayer having fraudulently omitted relevant information, or a major mistake on the part of the IRS which was obvious to the taxpayer (for example a statement that "the penalty would be $27.5K which represents 27.5% of your high balance" when in fact the high balance was $200K.)

Same Anonymous here. I've done the numerical analysis of different penalty scenarios. My high balance is large enough that NW penalty would be much less than willful. What I don't have an answer to is where I stand on the different shades of gray; as with most I have a mix of good and bad facts. In other words, do I have a 10%, 30% or 50% chance that the iRS will allege I am willful, and if so, would they want a penalty of 50%, 40%, or 30% of my high balance. No one seems to know. The prevailing opinion is that the IRS can do whatever it wants.

The article says that on opt out, PFIC calculations would have to be redone from MTM to default method, but does not mention that MTM is optional, and that the default method can be used to begin with in the amended returns submitted with OVDI. Even if the person does not opt out, default may be better than MTM, depending on individual circumstances.

It had been announced that individuals could obtain an exemption from electronic filing. However the FAQs state: "Can I submit a printed version of the electronic Bank Secrecy Act (BSA) E-Filing BSA Form to FinCEN?No. FinCEN will not accept printed versions of the forms produced by BSA E-Filing. This type of submission does not meet the reporting requirements under Title 31, Part 103 of the Bank Secrecy Act."

So although filing the form costs "Nothing" per the FAQ I am expected to either 1) file it from a public library at a library or internet cafe, while praying that this public computer doesn't have viruses sending my info so some scammer and that nobody looks at my information on the papers I use to fill out the FBAR or on the screen or 2) buy a computer for the purpose, get internet access for the purpose.

I have been unable to find a listing of the info needed or what the input fields are so there may be some new bit of info that I won't have when going to the internet cafe.

Thanks for highlighting that the US is #6 in financial secrecy. It appears that it will move up to number 5. It's notable that so far there has hardly been a peep about: #2 Luxemburg, much smaller than Switz. in area and population, #3 Hong Kong, former British colony now part of China, presumably much stronger to stand up to the US, #4 Cayman Islands, former British colony, presumably protected by the UK as are the Bahamas, Bermuda, Turks& Caicos, Channel Islands and London itself and #5 Singapore, tiny little city-state.

Well, before all of this, some Tax Justice Network-friendly folks were arguing that the Swiss were Nazis who were hiding stolen art and that FATCA would cause Switzerland to drop back into the dark ages. Now, it looks like the art stolen from the Nazis was found in Germany and so the Tax Justice Network is fussing to fuss so that it can fuss about the wrong things.

With the Mexican-US IGA, the US ensured that it would not have to report the interest of 11 million Mexican illegals living and banking in the US to the Mexican authorities. Did the Tax Justice Network not want to complain about this since it doesn't support their bigotry against Switzerland?

If more Americans distanced themselves from the Tax Justice Network to actually care anything about tax evasion, then they would stop being bigots and ensure that their IGA with Mexico reported the finances of illegal aliens living in America to the Mexican authorities.

unfortunately I am not surprised that you have been taken to the cleaners by your tax lawyer and paid for his learning curve. I do not want to sound like a smart ass but my hunch is ``after connecting your dots`` (UBS) that to enter OVDI was the right decision at the time but involving any tax lawyer the wrong one since you are capable to do whats necessary yourself. I know of many cases where the taxpayer paid approx. $2-3K for 8 years of amended returns plus did the administrative work (IDRs) of collecting all the bank statements etc. himself without the POA cost Bermuda death triangle between yourself, the tax lawyer and your CPA and with the help of TAS avoided the added stress and costs of a tax lawyer totally. I understand your motive of cleaning house before wanting to opt-out but unfortunately you needed a second and third opinion. Btw. I noticed that currently the retainers and ``I have you covered`` packages have come down quite a bit - business seems to be slowing down.

True, but since MTM is frequently preferable and in this context is only available for persons participating in the program, they key point is that, if one has prepared amended (or original) returns based on MTM and is considering an opt out, one has to understand that one cost of the opt-out is loss of MTM.

how does one go about calculating the 27.5% penalty base. It is the higher of (i) highest aggregate account balance in the past eight years or (ii) Fair Market value of non-compliant foreign assets or both.

for instance, if the highest aggregate account balance is $250,000 in 2011, real estate worth $210,000 that was sold in 2009 and real estate worth $400,000 that was sold in 2013. is the penalty base $400,000 + 250,000 + 190,000= $840,000 or

is the penalty base the higher of $250,000 or $400,000, hence $400,000.

The US would be #1 if the Tax Justice Network did the ranking based on secrecy rather than bigotry. The US is becoming #1 on financial secrecy because it uses FATCA to collect the financial data of individuals living around the world while refusing to provide the financial data of individuals living in the US. So, it is like a black hole of secrecy which collects data without providing the same for nontransparent purposes.

OVDI period 2006-13 : I do not know if you are a Homelander or a NR,NF ?There are fine differences within OVDP. If you purchased the real estate with legally taxed funds from foreign source income most examiners do exclude it from the penalty base but if you are a USP only than it is included as a non-compliant foreign asset. If you have earned rental income before selling the real estate than those years before the sale become important too.

There are two real properties owned from 2006-2008 that are non-compliant because they earned income that was not reported on U.S. Income tax returns (but should have). One property was sold in 2008 for $200,000. the proceeds from the sale were deposited into one of six foreign accounts. At all times property 2 with a FMV of $400K was owned by the taxpayer.

I called the OVDI hotline today and was told that the penalty computation is an "AND." meaning that you would take the highest aggregate account value per year and add the fair market value of all of your real estate to determine the penalty base.

for instance, taxpayer has two accounts and owns two parcels of non-tax compliant real estate.

** the OVDI hotline said that even though the funds were deposited into the bank account you can back them out because it would cause a duplication of the sale proceeds and the real estate.

Therefore assuming i do that for every year and lets say 2009 was the highest aggregate value, the penalty would be $900,000 times 27.5%= $247,500.

That is my understanding, please correct me if you think i may be wrong as this is all new to me. I told the OVDI hotline agent that the penalty computation worksheet specially says "highest aggregate account value OR fair market value of real estate." however, she insisted that it should really be an AND/OR.

The article states that those facing a 500K OVDI penalty might have greater inducement to opt out than those facing a 50K penalty, all other facts being equal except for account balance.

I'm not sure that would necessarily be the case.

He assumes both would have "good facts" yet such cases may be rare, most of us have a mixture of good and bad facts, for example the initial funds were taxed here or abroad, but the interest had gone unreported and had checked NO on Schedule B. This would be a more typical fact pattern.

I would not expect (or perhaps am just hoping) that the IRS would assess the maximum nonwillful penalty son someone with a relatively small account, when the person has generally good facts, as assumed for this example.

Also, although legal costs would essentially be the same for a large and small account, there have been successful optouts by self-represented people (ij, Moby, JustMe and anon5percent.) Furthermore, the time/cost of optout is a consideration not just for individuals but also for the IRS so one should not expect a long protracted fight from the IRS over smaller accounts with good facts.

Anonymous, I agree with you that, all other things being equal, the higher balance situation is not the better case for opt out. I would say just the opposite. But it would be hard to imagine a case where, in fact, all other things were really equal, so caution is required. As an analytical tool, of course, we can consider this type of example.

Our office has many cases being handled in the Chesterfield, MO office. We were also told for months that opt outs were being transferred to Milwaukee. Over the last few weeks, it appears things have changed. We are now being advised that opt outs are being retained in Chesterfield and will be handled by the same examiner working the case (there still is opt out committee that said examiner reports to) or a few examiners in the Chesterfield office.

We have been similarly advised with our opt outs in Florida IRS offices. Over the last few weeks, we have been advised that opt outs will be handled by the same examiner working the case.

So far, we have have had very few opt outs going to a specialized opt out examiner.

I think this process change significantly benefits taxpayers (and also the IRS in terms of efficiency since the initial examiner is already familiar with the case).

In most cases, the examiner and the taxpayer (or taxpayer's representative) have had numerous conversations over several months. The taxpayer (or taxpayer's representative) can have a detailed conversation with the agent to take the agent's “temperature” as to the circumstances and the agent's unofficial position on penalties in an opt-out. In fact, our office prepares a comprehensive letter advocating the mitigating circumstances and reasonable cause factors with an application to the applicable law, IRM, etc.

Since an opt out election is irrevocable, this dialogue is incredibly helpful in advising our clients whether to opt out or not.

yes thank you Mr. Patel for letting all of us know that your office prepares a comprehensive letter advocating the mitigating circumstances and reasonable cause factors with an application to the applicable law, IRM, etc. Btw. I am able to provide the same service free of charge as well.

Robert Wood's comment that someone facing a $50,000 penalty should probably not opt out really bothered me. Perhaps that is true for High Net Worth individuals, but many in OVDI are not in that category and $50k is a significant portion of their retirement savings. My OVDI penalty was around that amount and considering the excessive fees I had already paid to lawyers, every penny counted. My lawyers gave me the same advice that Robert Wood gave. My solution was to fire them and go it alone. I had an extremely positive result. Yes, it took time to reach this result, but the time I put into it did not add up to $50k. If your lawyers cannot do your opt out for less than your OVDI penalty, then consider reading the IRM yourself, plus documents posted by Just Me and myself on this site and contracting a lawyer for an agreed number of hours to advise you on the strength and presentation of your arguments. You can probably do all the procedural matters yourself. Additionally, based on what my agent told me and what anecdotal results are showing, it appears that penalties can be decreased if you are able to show a number of good facts. I also think Anonymous is right, for smaller accounts, the IRS does not want to spend a lot of time and money on fighting over penalties, especially when a number of good facts are shown.

Keep in mind that the FBAR does not require real estate to be reported, so on opt out it would be only the financial accounts that would fall in the penalty base. This would generally only help if the real estate was purchased prior to the 8-year lookback period and not sold during that time, since if the money was in a financial account during even one year, it would not have a major effect on your highest balance.

The fact that the FBAR is part of banking law, not tax law, seems to be in the back of everyone's mind, probably because the IRS deals with FBAR noncompliance and because most, if not all, lawyers dealing with FBAR are tax attorneys.

But are there cases in which banks have violated similar reporting requirements, and what have the penalties been? It's conceivable that for most violations banks have paid penalties far less than the 27.5% of high balance that individuals are expected to pay (even though individuals do not have a compliance department as banks do.)

The cases in which banks have paid significant penalties appear to have involved the most egregious conduct such as public corruption and money laundering (such as Riggs bank, seehttp://en.wikipedia.org/wiki/Riggs_Bankand scroll down to "Scandals."

I have am not aware of such penalties for relatively minor violations such as failure to file required reports. Typical penalties for businesses that fail to file a W2 or 1099 are in the order or $50-100.

As stated above, if the individual had gotten a check from sale of noncompliant real estate and deposited that in a US bank PRIOR to joining OVDP, would the individual's entire US bank account and the money in it, become noncompliant too and included in the penalty?

If that is the case, your on-shore savings will be included in the max balance as well.

Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.